Three Retail Stocks For the Holiday Season

The time has come to shift our focus back to the retail sector, specifically the apparel retailers. The entire sector has been battered down with no mercy, and justifiably so. After all, the housing market is in a huge slump, the credit markets are extremely tight, oil prices are at $95/barrel, consumer spending is unspectacular, same store sales figures are dismal, and third quarter earnings reports from several retailers are disappointing.

As a result, we have seen a number of these companies lose more than 30% of their value over the past couple months. Many analysts anticipate a weaker holiday season than previous years due to the various financial pressures highlighted above.

Accordingly, they have lowered their earnings expectations and outlooks for most these apparel retailers. Up until now, we have not been in opposition of these opinions, as economic conditions continue to look bleak. However, we are now becoming buyers of many of these companies, as their falling stock prices have been unjustifiably exacerbated by continued meltdown in the financial sector.

Despite the negative euphoria surrounding these stocks, we cannot ignore the fact that we are entering the strongest two months the year with regard to consumer spending. Every year, Americans seem to defy the laws of economics by managing to spend huge chunks of their excess cash and available credit during the holiday season.

We believe that although consumers will be faced with tight pocket books, the holiday season will still be strong, albeit not as strong as previous years. Even though everyone on the street has low expectations for the retail, its still does not make sense that so many of these companies are trading near 52 weeks lows heading into this historically strong seasonal period. Now that expectations are so low, it is much easier for some of these retailers to exceed these conservative holiday sales projections.

We have identified three companies that are likely to over-deliver on their sales figures in the coming months, and will experience significant stock price appreciation.

Lululemon Athletica (Nasdaq: LULU) – This is our favorite name out of the whole group. Lululemon is a Canadian-based specialty retailer that sells athletic apparel inspired by yoga and healthy living. The company is expanding in the U.S. at a torrid pace with numerous stores scheduled to open in late November. We are encouraged by the company's announcement a couple weeks ago regarding their increased forecast for same store sales figures, and expect this momentum will continue into the holiday season.

• Current Price: 41.30
• Year End Target: 54.00

American Eagle Outfitters (NYSE: AEO) – American Eagle has become extremely undervalued relative to its peers, trading only 12 times trailing earnings. This is a teen retailer, whose largest and most in-line competitor is Abercrombie & Fitch (ANF). Not only is AEO a better value play than Abercrombie, but their prices are significantly less expensive, thus being more attractive to consumers faced with the above-mentioned financial issues.

• Current Price: 21.87
• Year End Target: 26.50

Coach (NYSE: COH) – Coach is a high end retailer of handbags and accessories, that has seen its stock price drop by 40% over the last couple months. The drop came following a weaker than expected earnings report, citing slower traffic in their stores as the primary problem. But considering that we are on the heels of the holiday season, we don't anticipate slow store traffic to be much of an issue. Although recent data shows that discount and department store retailers were the hardest hit by softer consumer spending, the high-end market is still alive and well.

• Current Price: 33.07
• Year end Target: 43.00

Disclosure: Author has a long position in the above-mentioned stocks

Comments

[Love to short:]

Great call with COH. I have realized a sizable gain since your posting. This stock has performed tremendously well despite the entire retail sector being in a slump. High end retail will continue to be an outferformer within this industry group. Thanks.

2007 Dec 03 07:52 PM